The recent credit policy was bang in line with the expectations of most debt-players. Everybody expected a rate cut.
Indeed, the RBI has cut both the benchmark Bank Rate (by 0.25 per cent) and also lowered Cash Reserve Requirements.
The CRR cut releases more funds from a banking system already overflowing with unutilised cash. Combined with a lower Bank Rate, it means that banks should drop their lending rates.
That would be the conventional wisdom and indeed, SBI has already announced a cut. But conventional wisdom also suggests that a rate cut, coupled with lower CRR, should result in dropping debt-market yields. The debt market has, however, responded by pushing up yields a little in response to the Credit Policy.
A rate cut, which triggers a rise in yields, suggests that the market was actually betting on a bigger cut and is readjusting downwards. This was not a realistic expectation. Inflation is just below the new Bank Rate and the RBI could hardly ignore that indicator.
If bank lending rates were close to the Bank Rate, India would now have the lowest real interest rates in recorded history. The Bank Rate is at the lowest levels since Independence and, one could make a case, so are the real spreads.
This is a global trend. Stuck in a long recession, central bankers in most places have responded with rate cuts. Japanese rates are nearly zero
